Heuristics and Public Policy: Decision Making Under Bounded Rationality
83 Pages Posted: 20 Jun 2018 Last revised: 5 Jul 2018
Date Written: June 19, 2018
How do human beings make decisions when, as the evidence indicates, the assumptions of the Bayesian rationality approach in economics do not hold? Do human beings optimize, or can they? Several decades of research have shown that people possess a toolkit of heuristics to make decisions under certainty, risk, subjective uncertainty, and true uncertainty (or Knightian uncertainty). We outline recent advances in knowledge about the use of heuristics and departures from Bayesian rationality, with particular emphasis on growing formalization of those departures, which add necessary precision. We also explore the relationship between bounded rationality and libertarian paternalism, or nudges, and show that some recent objections, founded on psychological work on the usefulness of certain heuristics, are based on serious misunderstandings.
Keywords: Heuristics, Biases, Bayesian Rationality, Ecological Rationality, True Uncertainty, Libertarian Paternalism, Behavioral and Experimental Economics, Behavioral Economics, Experimental Economics, Microeconomics
JEL Classification: D00, D01, D03, D90
Suggested Citation: Suggested Citation